Having recently provided commentary on the implications of Electricity Market Reform (EMR) in the UK we thought it worth revisiting the topic now that the first capacity auction for the UK’s National Grid has taken place.
The auction opened on the 16 December 2014 and closed two days later, with generators securing agreements for around 49.3 GWs of capacity at a clearing price of GBP 19.4/kW. The capacity, which will be supplied to the National Grid for the year commencing October 2018, represents 90% of the UK’s estimated peak load demand.
Prior to the auction, some 65 GWs of generation had pre-qualified. Given that the original target capacity for the auction was 50.8 GWs, the implication being that the auction would be oversubscribed and that the ultimate clearing price would be lower than perhaps originally envisaged (given the concerns around plant retirement, and a price cap of GBP 75/kW).
The preliminary results are yet to be ratified, but it appears that while the government has secured its desired capacity, the vast majority of the electricity will be supplied by the current generating fleet (either as is or with refurbishment). Only 5% of the capacity auctioned will be provided by newly built plants, although this constitutes 25% of the actual number of successful generating units securing agreements.
On further analysis, only one major new facility, Trafford Power Station, was successful in the auction and while this represented approximately 50% of the new build capacity, the big winner in the auction appears to have been smaller peaking facilities.
This means that while the auction has successfully secured the desired capacity for the 2018 delivery year and given electricity providers some price certainty, it has not led to the creation of new, efficient, base load generation, one of the primary purposes of the EMR process.
Clearly, the success of small scale peaking capacity in the auction will fit well in balancing the system during periods of volatility, likely to be more frequent as the contribution of renewable energy increases, but at a price to the consumer?
Ultimately, the 2014 auction failed to address the increasingly urgent challenges created by the retirement of old and less efficient electricity plants and the limited redundant capacity in the UK system overall.
We hope that the next capacity auction will improve the position, although the inclusion of interconnectors providing capacity from outside the domestic market in future auctions could also restrict the incentives for new capacity.
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For further information, please contact Kevin Seakins, Construction on +44 (0)20 7528 4814